Do the poorest countries need industrial policy? The UN says yes.

September 3, 2009

     By Duncan Green     

Jetlag is a wonderful way to catch up on your paper backlog. Just been reading UNCTAD’s 2009 Least Developed Countries report (published in July). Limpid prose it ain’t, but it sets out a coherent case for a ldc2009_enpost-Washington Consensus push for state-led industrialization in the world’s poorest countries. (I blame the turgid nature of UN-speak for the over-lengthy nature of this post – it’s very hard to precis.)

UNCTAD’s starting point is that ‘the impact of the global economic crisis is likely to be so severe in the least developed countries (LDCs) that “business as usual” is no longer possible. This will necessitate a rethinking of the development paradigm’. Which means:

‘In order to overcome LDCs’ structural constraints and reduce their external dependence, it is necessary to reconsider the role of the state… three major policy orientations are required:

Firstly, policies should be oriented towards stimulating productive investment, building technological capabilities, and strengthening linkages within and across sectors and between different enterprises. Strengthening domestic productive capacities should also be aimed at producing a wider range of more sophisticated products;

Secondly, it is necessary to build a new developmental state. This is not a matter of going back to old-style development planning, but rather a question of finding new forms of development governance appropriate for the twenty-first century. Such development governance would be founded on a strategic collaboration between the state and the private sector, that will encourage the structural transformation of LDCs from agrarian to post-agrarian economies; and

Thirdly, it is necessary to ensure effective multilateral support to LDCs. This is not simply a question of more and better aid, but also the design of rules that govern international economic relationships with regard to trade, finance, investment and technology flows, in ways which would support development in LDCs. It is also critical that support for LDCs does not impose unnecessary limits to the measures that governments can take to promote development, structural transformation and poverty reduction.’

The report then focuses on number 2 – the tricky question of how to build a developmental state where none exists. This is the question that always comes up when Ha-Joon Chang, Dani Rodrik, Alice Amsden, Robert Wade and others are banging on about industrial policy – South Korea is all very well, but can industrial policy really work in weak states in Africa and elsewhere?

UNCTAD starts off by distancing itself from both the current focus, and the East Asian model: ‘neither the good governance institutional reforms which many LDCs are currently implementing, nor the old developmental state, including successful East Asian cases, are entirely appropriate models now.’

The critique of current approaches to good governance is convincing: ‘the good governance institutional reforms which are being propagated and undertaken in the LDCs are founded on a much narrower view of what constitutes good governance.

The narrower understanding is rooted in an implicit dichotomy between good and bad government systems. This contrasts a formalized type of good governance system with an informal, personalized, bad governance system.’ [The recipe] ‘involves introducing into developing countries particular types of institutions which are characteristic in developed countries.’ Such institutions include electoral democracy, new public management, and a reduced role for the state (basically, supporting the workings of markets, by guaranteeing property rights and the rule of law and providing public goods).

UNCTAD says this kind of institutional transplant is sometimes too much for countries’ weak administrative capacity and often irrelevant. Instead it argues for what it calls ‘good development governance.’ Good development governance resembles an institutional variant of growth diagnostics – identify and deal with a small number of ‘binding constraints’ to structural transformation (which the report identifies as ‘developing productive capacities, expanding productive employment and increasing labour productivity’). UNCTAD calls for a ‘focused approach which seeks to sequentially build minimum governance capabilities.’

Can it be done in today’s weak states? Yes, according to UNCTAD: ‘This Report does not romanticize the capabilities of public officials in successful countries. They were not omniscient Supermen and Bionic Women. However, competent bureaucracies were constructed in a few key strategic agencies, and state capabilities to promote development were built up through a continuous process of policy learning about what worked and what did not work….. The whole process was driven by a developmentally-oriented leadership of politicians and bureaucrats committed to achieving a development vision for society rather than personal enrichment and perpetuation of their own privileges…. The political legitimacy of this visionary group was rooted in a social contract.’

In contrast to the Asian tigers of yore, this ‘new developmental state’ will give greater emphasis to knowledge and innovation, diversify within agriculture and services, rather than just into manufacturing, and give a greater role to foreign investment, global supply chains, and regional markets.

UNCTAD then drills down into 3 areas: macroeconomic management, agriculture and industrialization.

On economic management, it comes down against either fully fixed or fully floating exchange rates, praises ‘the effectiveness of capital controls’, and argues that investment in traditional infrastructure (roads, irrigation, energy) has been squeezed out by social spending in recent years.

On agriculture, UNCTAD argues that ‘For the LDCs, the food crisis is really a chronic rather than a short-term problem, the result of low or falling levels of agricultural investment and fundamental failures of policy. An effective strategy for growth and development, based on the creation of new comparative advantages and production capacities, cannot succeed unless agriculture is made more productive. Without a significant agricultural surplus, food security will remain precarious and diversification of the national economy into manufacturing and other sectors will be undermined by rising food prices and wage costs.’

Reviving agriculture will require above all, ‘institutional reconstruction’ of much-neglected ministries of agriculture. UNCTAD does its best to avoid the pitfalls of peasant romanticism: ‘For some areas, the only future might be the long-term decline of farming, accompanied by substantial outward population migration. What this implies, essentially, is that — before contemplating serious measures to promote agricultural growth in a given area — LDCs should take a hard look at agriculture in that area, examine its economics and consider what income levels it can reasonably support.’

On industrial policy, the report argues that ‘mastery over an expanding range of more sophisticated products is central to the growth development process’, which in turn requires a ‘Developmental Industrial Policy’, more geared to creating an enabling environment for entrepreneurship (labour market, technology and fiscal policy, public services etc). The goal is ‘rapidly generating a critical mass of firms undertaking commercial innovation, i.e. continually introducing products and processes that are new to the country.’

UNCTAD reckons the minimum institutional basis for achieving this is a combination of:

· ‘Islands of excellence within the ministries and executive agencies of LDCs, which can provide lessons about what works and does not work
· A competent pilot agency, close to political power, that can provide overall vision and coordination. 
· An institution dedicated to aid management.’

And the implications for donors? UNCTAD concludes: ‘Approximately 20 per cent of aid to LDCs now goes to improve government capabilities. This aid should be refocused from the current good governance institutional reforms towards promoting good development governance and building developmentally-capable states in LDCs.’

Interesting to compare this UN wish-list with the reality revealed by a survey by the South Centre of industrial policy in 8 African countries. It found that while nearly all governments have an explicit commitment to diversification and industrialization, this was mainly in the traditional form of promoting export-led growth and attracting foreign investment, (much of it in low value added areas like mining). Not much sign of explicit efforts to upgrade technology there, and little focus on regional African markets. A big gap remains between UNCTAD’s vision and Africa’s reality, it seems.

September 3, 2009
Duncan Green